Closer look
The Dayton Daily News analyzed eight years worth of bankruptcy filings and found they continue to decline both in Ohio and nationwide, after peaking from 2006 to 2009.
Personal-bankruptcy filings declined across the region and state in 2013 for the third consecutive year, but that does not necessarily mean that residents are experiencing fewer financial problems, according to experts and new data.
Job loss, home foreclosure, divorce and medical issues are among the leading reasons why people file for bankruptcy.
Economic conditions certainly are better than they were several years ago, with notable declines in foreclosures and mass layoffs. Consumers are carrying less debt, and though lending remains fairly tight, access to credit has eased, allowing people to borrow to avoid a showdown with creditors, experts said.
But it is likely that many people are not filing for bankruptcy because they are unemployed and lack income that can be garnished to pay creditors. Bankruptcies are expected to increase when the economy strengthens and more people return to work.
“It sounds contradictory, but if we do see stronger job growth, we’ll see an increase in bankruptcy filings because people will say, ‘I’ve got this job, but I still can’t pay my bills and people are calling me all the time and threatening me with lawsuits,’” said David Larson, a shareholder with Altick & Corwin Co., a general practice law firm in Dayton.
Personal-bankruptcy filings fell 12 percent last year to 5,853 in Butler, Champaign, Clark, Greene, Miami, Montgomery and Warren counties, according to data from the U.S. Courts, the federal court system. Filings for Chapter 7 and 13 bankruptcy proceedings have declined 34 percent since 2010. Consumer bankruptcies declined 5 percent across Ohio last year.
People, like businesses, sometimes fail financially, and they file bankruptcy to shield themselves against debt collectors. Through bankruptcy, consumers can discharge many types of debt, including medical bills, lawsuits and judgments, utility bills, credit card bills and unpaid rent.
Chapter 7 bankruptcy is a liquidation bankruptcy designed to wipe out general unsecured debts such as credit cards and medical bills, according to Nolo, a provider of legal information and products. To qualify for Chapter 7 bankruptcy, filers must have little or no disposable income
Chapter 13 is a reorganization bankruptcy designed for debtors with regular income who can pay back at least a portion of their debts through a repayment plan, the group said.
The decline in filings hopefully suggests that the economy is doing a little better and some people are avoiding financial catastrophe, said Larson, with Altick & Corwin Co.
After the recession, consumers began borrowing less and paying down debt more quickly.
As of September 30, total consumer debt stood at $11.28 trillion, up 1.1 percent from the previous quarter, but still 11 percent below the peak of $12.67 trillion in the third quarter of 2008, according to the Federal Reserve Bank of New York.
Foreclosures have been trending downward since the second quarter of 2009, and they are at the lowest level since 2005, the New York Fed said. The economy has been adding jobs instead of shedding them.
But bankruptcy is a crucial part of the economic system in good times and in bad because it gives people who cannot pay their creditors a way to get a clean slate, Larson said.
“The whole idea is that people can get a fresh start if they find themselves in situations that are insurmountable,” he said.
Virtually anyone, not just people who have been financially irresponsible, can be saddled with unmanageable debt, Larson said. All it takes is a significant life event.
People may lose a job and suddenly have no way of paying their bills. People get divorced and their monthly income is chopped in half or worse. People may get behind on their car and home loans and face losing their property. People who become ill or injured can get stuck with enormous medical bills.
More than one in five Americans struggle to pay medical bills, and three in five bankruptcies are due to medical expenses, according to a study last year by NerdWallet Health, a medical-expense-comparison website.
The reduction in foreclosures and consumers shrinking their debt loads may partly explain the decline in filings. But banks have cut back on lending, and the credit crunch means consumers have fewer opportunities to take on more debt than they can handle, said Russ Cope, a bankruptcy attorney with Cope Law Offices LLC in Centerville and chairman of the Bankruptcy Committee for the Dayton Bar Association.
“Banks are scrutinizing loans quite a bit more, and there is just not as much money, lending and credit going through the system,” he said. “When banks are more reluctant to lend, you are going to have fewer bankruptcies.”
And yet part of the decrease may be attributable to people being out of work and “uncollectible,” meaning they lack income and assets creditors can seize.
The job market remains extremely weak, and about 432,000 Ohioans were unemployed last year, and many others dropped out of the labor force because of a lack of job opportunities.
Avoiding wage garnishment is one of the main motivations to file for bankruptcy, but there is no reason to file if there is no income that needs protecting, Cope said. Jobless residents often do not need bankruptcy protection until their financial situations improve.
“What spurs (clients) to come in and go through the filing process is somebody is about to attack their wages,” he said. “In Ohio, (wage garnishment) is really punitive, and it is tied for no. 1 in the country at 25 percent of your gross income per pay period.”
Filing for bankruptcy can help discharge debt, but it is not cheap and there are some significant economic consequences, said Jay Zagorsky, a research scientist at the Center For Human Resource Research at The Ohio State University.
A bankruptcy stays on a person’s credit history for years, potentially impacting his or her borrowing ability. A study co-authored by Zagorsky found that it can take one to two decades or longer for a person who files bankruptcy to reach the same financial status as his or her peers.
“(Bankruptcy) does help people recover but the process is very long and it takes many years for the problems of bankruptcy to be washed away,” he said.
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